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Canadian GDP posts surprise growth in Q4; loonie rises to 3-month high

Canada’s economy posted surprise growth in the final three months of 2015, expanding by 0.2% quarter-on-quarter and beating estimates of zero growth. This still represents a slowdown from the previous quarter though, when GDP rose by an upwardly revised 0.6% rate.

On an annual basis, GDP was up by just 0.5% due to the two consecutive quarters of negative growth reported in the first half of 2015.  Canada’s economy has been struggling since 2015 mainly as a result of the slump in the price of oil, of which Canada is a major exporter. This has led to the sharp depreciation of the Canadian dollar which fell by 19% against the US dollar in 2015. It has firmed around 2% since the start of 2016 as oil prices appear to have started to bottom out. The greenback dropped below C$1.35 for the first time in nearly three months and hit a low of C$1.3455 after today’s data. It peaked just below C$1.47 in January.

The loonie’s decline helped exports to rebound by 2.6% in the third quarter, helping the economy exit technical recession during the first six months of 2015. But the weakening global demand appears to have hurt exports in the last quarter as they decreased by 0.6%. Exports of energy products were down by 2.8%.

Business investment also declined over the quarter and was down by 3.3%. Household spending moderated from 0.5% in the third quarter to 0.2% in the fourth quarter but was the only sector apart from the government sector to make a positive contribution to GDP growth. Much of the boost to fourth quarter growth came from a sharp drop in imports, which were down by 2.3%.

Overall GDP growth in 2015 came in at 1.2% – a marked slowdown from the 2.5% rate in 2014. The Bank of Canada is forecasting that the economy will grow by 0.25% in the first quarter of 2016. December’s monthly GDP growth of 0.2% may be a positive sign that the growth momentum will continue into 2016. Monthly growth would have been stronger in December if it wasn’t for the unexpected weakness in retail trade.

The Bank of Canada is due to hold its next policy meeting on March 9 and is expected to keep rates on hold at 0.5%. Rates have been on hold since July 2015 as the Bank is counting on a weaker loonie to boost exports as well as increase import prices. The central bank is unlikely to cut rates anytime soon unless growth deteriorates significantly or there’s a notable appreciation of the Canadian dollar.

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